Chapter 9 Fixed Assets and Intangible Assets 407For ease in applying the straight-line method, the an-
nual depreciation may be converted to a percentage of
the depreciable cost. This percentage is determined by di-
viding 100% by the number of years of useful life. For
example, a useful life of 20 years converts to a 5% rate
(100%20 years), eight years converts to a 12.5% rate
(100%8 years), and so on.^2 In the above example, the
annual depreciation of $4,400 can be computed by multi-
plying the depreciable cost of $22,000 by 20% (100%
5 years).
The straight-line method is simple and is widely used.
It provides a reasonable transfer of costs to periodic ex-
pense when the asset’s use and the related revenues from
its use are about the same from period to period.Units-of-Production Method
Sometimes the use of the fixed asset varies significantly
from period to period, such as might be the case for ve-
hicles, aircraft, or construction equipment. When the
amount of use of a fixed asset varies from year to year,
the units-of-production method may be more appro-
priate than the straight-line method. In such cases, the units-of-production method bet-
ter matches the depreciation expense with the related revenue.
Theunits-of-production methodprovides for the same amount of depreciation ex-
pense for each unit produced or each unit of capacity used by the asset. For example,
Norfolk Southern Corporationdepreciates train engines on the basis of hours of
operation, which is its unit of capacity.
To apply this method, the useful life of the asset is expressed in terms of units of
productive capacity, such as hours or miles. The total depreciation expense for each
accounting period is then determined by multiplying the unit depreciation by the
number of units produced or used during the period. For example, assume that a
machine with an initial cost of $24,000 and an estimated residual value of $2,000 is ex-
pected to have an estimated life of 10,000 operating hours. The depreciation for a unit
of one hour is computed as follows:$24,000 Initial Cost$2,000 Estimated Residual Value
$2.20 Hourly Depreciation
10,000 Estimated HoursAssuming that the machine was in operation for 2,100 hours during a year, the
depreciation for that year would be $4,620 ($2.202,100 hours).Declining-Balance Method
Thedeclining-balance methodprovides for a declining periodic expense over the
estimated useful life of the asset. To apply this method, the annual depreciation rate is
often expressed as a multiple of the straight-line rate. When the rate is doubled, the
declining-balance method is called the double-declining-balance method.For example, the
double-declining-balance rate for an asset with an estimated life of five years is 40%,
which is double the straight-line rate of 20% (100% 5 years).
For the first year of use, the cost of the asset is multiplied by the declining-balance
rate. After the first year, the declining book valueor net book value (initial asset cost2 The depreciation rate may also be expressed as a fraction. For example, the annual straight-line rate for
an asset with a three-year useful life is^1 – 3.© EDMOND VAN HOORICK/PHOTODISC/GETTY IMAGES
Q.A truck that cost
$35,000 has a residual
value of $5,000 and a
useful life of 125,000
miles. What are (a) the
depreciation rate per mile
and (b) the first year’s de-
preciatiion if 18,000 miles
were driven?A.(a) $0.24 per mile
[($35,000$5,000)
125,000 miles],
(b) $4,320 (18,000
miles$0.24 per mile)